Wealocity blog

We shouldn’t trust our own predictions – not because they’re never right – but because they’re irrelevant. Good investments can weather surprises. ~ Zach Shrier (Shrier Wealth Management)

Beginning of last year, the biggest risk factors were of oil crash, high-yield debt and China. Now, the risk landscape is dominated mostly by politics - be it Brexit, the new US administration and of course Demonetisation. What were earlier pure risks, both De-globalisation & Demonetisation have turned into trends this year with more politicians taking steps in that direction. So, predicting future or the market outcomes is turning in to a foolish errand. With the new US administration its positive for India on foreign policy (anti-China), military relationships & security (anti-terror) arrangements while it’s negative on manufacturing and IT, though on an overall level we score brownie points on immigration. Add to this the Russian mania, hard-Brexit, still simmering Syria & the UN conundrum are matters that could destabilize the global economy. We believe that the domestic economy would take about 15-18 months (from Nov’16) to get back to normalcy. This is of course, taking into account the new US policies and the possible ensuing global intricacies.

Even if you know the outcome of an event, you don’t necessarily know how the market will respond. ~ David Schawel (New River Investments)

What’s in it for you:   USD: This will be the main driver in the new year. It defines the movement of all other asset classes, though, it would be interesting to see how the Fed treads with the hikes as the dollar rises and the new President pushes for De-Globalisation. Could it lead to a Dollar crisis and could Trump stop it? Wait till next year!!!   Oil: The deal among the OPEC and non-OPEC members has lifted the prices of late. But, it still needs to be seen how the implementation works and how would these traditional players keep the shale players at bay and for how long?   Gold: If one were to look at gold as another currency and not as an inflation hedge then could spot a problem. A secular dollar bull would definitely hurt gold. Domestically though, the USD parity would decide the price movements.   EU: Though Europe continues to struggle with its banks (despite the Deutsche bank deal) and economy, there seems to be early signs of revival despite questioning its own identity & integrity and the larger trends of politics playing at it.  EM and China: How to show a tall line short, draw a taller one beside, this is the case with China. The debt has gone past 450% of the GDP but somehow has lost prominence due to larger new issues around the globe. The monetary adjustments the Chinese are employing wouldn’t be of any meaningful use for inspiring growth. If the recent (tit-for-tat) moves along with the protectionist theme by the new USA are any an indication the geo-political tension that ensues is unwarranted for. The rise of USD could spell deeper trouble to the already persisting corporate debt trap of the EMs. Interest Rates: The divergent trajectory between the US and the rest of the world (though EU has announced a cut in the stimulus) is at an interesting point. Domestically, we’re yet to reach the bottom of the interest rates and would continue to slide in the coming months.   Equity: Markets generally price in advance and so domestically we could see the second-half of the year to be rosier, though any black swan event could derail the applecart.

In financial markets, it’s not the news that matters, nor is it the reaction to the news. As we learned during Brexit, and again during the U.S. presidential elections, it’s the reaction to the reaction that matters. ~ Jonathan Krinsky (MKM Partners) Our recommendations:   Gold: Not to exceed 10% of the portfolio. Gold bonds are better placed than physical gold as they would at least earn a decent interest rate over the price.   Debt: Enough of fixed income rally has played out and hence returns would moderate from now-on. Dynamic funds would outplay the traditional fixed income strategies in the three-year horizon.   Equity: The broader valuations of the indices reflect a buy-zone currently and could go moderately overweight on equities with a two-year perspective. However, the triggers would be the new US admin taking reins and the domestic budget. The state elections could also infuse fluctuations to the existing volatility. Unlike the earlier situations, not all the global event-risks are opportunities for exposure while the first-half seems better for lumpsum infusion.